Goldman Sachs: Looming Supply Crunch Means $85 Oil

By Spencer Swartz

OPEC has repeated in recent days that many long-term drilling projects are on the shelf because of uncertainty over future oil demand. That’s basically a mistake, Goldman Sachs says in a new report today.

Gotta open the taps (AP)

With a when-it-speaks-oil-markets-listen reputation (crude rebounded 2% today zoomed 5% to almost $70 on the investment bank’s revised oil forecast), Goldman provides more detail about a supply crunch it thinks is looming.

Simply put, Goldman thinks crude demand is going to recover at a very healthy clip, especially in Asia, and there just won’t be enough oil coming out of the ground to meet it. That’s a recipe for higher oil prices—$85 a barrel this year, up from Goldman’s previous $65 a barrel estimate previously, and nearly $100 a barrel by the end of 2010, Goldman now figures. (More on the report here.)

The bank says global supply growth over the next five years will dwindle to just 650,000 barrels a day—due to lagging investment and output in non-OPEC countries, especially. Goldman expects non-OPEC supply, about 60% of the world market, to fall by 400,000 barrels a day this year and by 910,000 barrels a day in 2010.

That supply will sharply trail crude consumption in China and other developing countries, which Goldman expects to grow by an optimistic 1.2 million barrel-per-day in 2010 after a big contraction this year.

There are two ways to square that supply shortfall without oil prices going to the moon again. The U.S. and other big oil-consuming nations would need to see big reductions in oil demand in order to accommodate growth in places like China. Or OPEC can step up to the plate and seriously boost oil production.

The problem is, OPEC’s been burned before: In the months after ramping up output last summer, the price of oil collapsed. OPEC secretary-general Abdalla Salem El Badri says there are no plans in member states to restart at least 35 longer-term projects with with a combined capacity of 5 million barrels per day. They were deferred, he says, because of an uncertain demand outlook.

OPEC’s comfort zone calls for crude prices between $75 and $85 a barrel. The cartel has made it crystal clear it won’t boost output until the world gets rid of big crude-oil inventories and there are clear signs that a demand recovery is in the cards.

But that’s making oil-watchers nervous. Everybody from the International Energy Agency to the International Monetary Fund is worried about a supply crunch a few years down the road, leading to higher prices. And we all know what that means.

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